4 Big Things Revealed at NAFCU’s Annual Conference

If you weren’t among the little more than 1,000 credit union industry executives, volunteers and vendors who attended NAFCU’s 46th Annual Conference in Boston last week, you missed out on these four important takeaways:

1. Becker’s cancer scare

President/CEO Fred Becker stunned conference goers – including members of his own board – during his farewell speech when he announced he had privately battled cancer during the financial crisis. Becker was diagnosed with bladder cancer in January 2009, shortly after participating in President Barack Obama’s inauguration.

Despite being otherwise healthy and fit, Becker was told his cancer was invasive, a high-grade Stage II or III with a survival rate of just 50% over the next five years. Unbeknownst to the vast majority of the industry, Becker managed NAFCU through the corporate crisis and Great Recession – including the conservatorship of U.S. Central and Western Corporate FCU – while simultaneously undergoing chemotherapy, surgery, multiple emergency room visits, procedures, and intense personal introspection.

He shared how when facing crossroads in life, challenges must be met head on with tenacity, resilience and adaptability. Becker retires from NAFCU July 31 after 13 years leading the organization.

Next: Matz Talks Risk-Based Net Worth Rule

2. Risk-based net worth rule under development

The topic had been mentioned in passing earlier this year, but Chairman Debbie Matz made it official during her Friday general session address: the federal regulator is developing new risk-based capital requirements that will be proposed in 2013.

Matz said the current 7% net worth requirement would remain the floor requirement for credit unions with little risk in their balance sheets.

However, credit unions with more than $50 million in assets would be subject to higher risk-based net worth requirements based upon their risk profile. In an educational breakout session following Matz’s speech, former NCUA Board Chairman Dennis Dollar cautioned against placing too many restrictions on large credit unions that carry more risk, because as an asset class, they generate far better returns than small credit unions.

And, Dollar said, net profits are the only way credit unions can build net worth.

Next: Dollar Disses Merger Rules

3. NCUA merger rules put SIF at risk

When it comes to mergers, NCUA rules put the share insurance fund at risk

During his breakout session, former NCUA Board Chairman Dennis Dollar said for federally chartered credit unions, the requirement that they share common fields of membership is the single biggest hurdle in approving mergers.

The NCUA could be more flexible with the rule, Dollar said, but the regulator faces constant legal pressure from bankers who threaten to sue over claims the NCUA approves mergers as a way to circumvent field of membership regulations. The result, Dollar said, is an inability to approve a merger with a troubled credit union until net worth falls to 3%, triggering involuntary merger rules that can waive the FOM requirement.

“If you have to wait until 3% before the NCUA is willing to merge them, you don’t want them anymore,” he said. “You would have taken them at 7% while on the way down to 3%, but once they’re at 3%, you’ll say, ‘no thanks’.”

That lack of interested parties puts the share insurance fund at risk when the NCUA is forced to liquidate the credit union, or negotiate a loss guarantee with a willing merger partner. Even in the case of Arrowhead Credit Union, which was released from conservatorship earlier this year and returned to the control of its members, Dollar said, “it’s not nearly the credit union it used to be.”

Next: QM Rule Roils Mortgage Loan Profitability

4. Mortgages rendered unprofitable by QM rule

During a breakout session, Jeff Schwalen, president/CEO of the St. Paul, Minn.-based Hiway FCU, said Consumer Financial Protection Bureau limits on closing costs make complying with the bureau’s qualified mortgage rule unprofitable.

Because QM loans are limited to closing costs of 3% of the loan balance, lenders in parts of the country with relatively low home values can’t generate enough fee income to cover their costs, he said.

For example, for a $50,000 mortgage loan, Schwalen said, actual costs in Minnesota are $2,613. However, 3% of that balance is just $1,500, resulting in a $1,113 net loss on the loan. A $135,000 mortgage would bring in a maximum of $4,050 in closing costs, but costs the $918 million credit union $75 more to make the loan.

In comparison, a $400,000 mortgage could generate up to $12,000 in closing costs and still comply with the QM 3% closing costs limit. While that would produce a $3,307 net profit, mortgages of that size aren’t common in the Midwest. In fact, the average mortgage loan amount in Minnesota is just $180,000, he said.

Schwalen said his credit union will make non-QM loans and hold them on the books. Not only will the strategy help fill a void in the marketplace, Schwalen said he can manage interest rate risk because the loans will have relatively low outstanding balances.